CBA jumps after record first-half profit

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CBA jumps after record first-half profit

By Eric Johnston

Update Commonwealth Bank of Australia has delivered a 13 per cent increase in first-half cash profit to a record $3.34 billion, but has issued a cautious assessment for the outlook for the Australian economy, highlighting that not all sectors are benefiting from the resource boom.

The bank’s latest result was helped by a drop off in bad debts. This offset indicates that revenue growth remains under pressure given higher funding costs.

CBA's shares rose as high as $55.48 before ending the day at $55.07, up $1.15 or 2.1 per cent. The stock is at its highest in about nine months. With a market value of more than $85 billion, CBA is the largest of the big four banks and about 60 per cent larger than the smallest, NAB.

The latest cash result came in slightly ahead of market expectations with most analysts forecasting the bank would deliver a cash profit of $3.2 billion for the six months to end-December.

Deutsche Bank analyst James Freeman said CBA’s better-than-expected first-half result boded well for the rest of the sector, with ANZ and Westpac scheduled to deliver quarterly updates next week.

Mr Freeman expected the market to start upgrading forecasts for CBA’s full-year earnings by as much as 5 per cent, reflecting better performance for underlying earnings, improved margins and tight cost control.

Rival National Australia Bank yesterday unveiled an 18 per cent increase in first quarter profit to $1.3 billion and highlighted that growth in business lending would resume in the second-half of the year.

CBA chief executive Ralph Norris said while the Australian economy continued to perform well, the banking industry faced a number of headwinds.

“Underlying credit growth remains subdued with both consumer and corporate confidence fragile. Competition is intense with depositors benefiting from historically high margins while wholesale funding costs also remain at elevated levels,” Mr Norris said.

“The outlook for the domestic economy remains positive as the resource sector continues to outperform, however some of our customers operating in other sectors of the economy are finding business conditions more challenging”.

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Optimistic

Still, he expressed “cautious optimism” for the rest of the bank’s 2011 financial year.

Headline or net profit, which takes into account swings in the value of the bank’s funds management business, came in a $3.05 billion for the half, up 5 per cent on the previous December half.

The result, however, missed the median estimate of six analysts surveyed by Bloomberg for $3.2 billion profit.

The bank issued a 10 per cent increase in its interim dividend to $1.32. This took its payout ratio to a little under 62 per cent.

The latest result revealed just how funding costs were playing havoc with the bank’s bottom line.

Group wide net interest margins – a key driver of profits - were crunched by 6 basis points to 2.12 per cent in the December half. However the bank’s controversial 45 basis point interest rate hike on mortgage in November was able to claw back some losses, with net interest margins up 4 basis points on the June half.

Elsewhere, banking revenue of $8.23 billion was up just 1 per cent on the previous half as the bank starting feeling the loss of revenue after it cut a number of account fees over the past year.

Bad debt charges, which pummelled bank profits during the global financial crisis, continued to fall as the economy recovered, dropping 48 per cent to $772 million during the December half.

Bad debt charges fall

CBA’s flagship retail banking business increased cash profit by 12 per cent to $1.38 billion, mostly as bad debt charges fell away. The profit jump came despite the unit being the hardest hit by funding costs on mortgages as net interest margin decreased by 10 basis points on the unit.

Home loan volumes grew by 8 per cent during the half, tracking in line with average growth volumes across the sector.

CBA’s business banking unit which looks after small to mid-sized businesses delivered a 15 per cent lift in cash profit to $506 million, helped by growth in lending volumes, improving deposit margins and a drop-off in soured loans.

Providing a drag on the broader group, CBA’s institutional banking business delivered a 7 per cent fall in cash profit to $512 million.

This was mostly on a fall in revenue due to lower trading activity in markets and a drop in lending.

Wealth management earnings were up 12 per cent to $329 million, helped by growth in funds management while the insurance business delivered robust margins.

BankWest, NZ rebound

Meanwhile, CBA’s New Zealand business rebounded with cash profit jumping 45 per cent to $234 million for the half.

BankWest regained momentum after a tough year, with December half profit of $224 million up from the $15 million in the previous corresponding period where bad debts nearly wiped out earnings.

Elsewhere CBA saw its return on equity levels rebound to the highest level since the onset of the global financial crisis. At 19.2 per cent, this was a 70 basis point increase from the December half a year earlier.

A previously announced $541 million investment program on technology started impacting CBA’s expense line, which was up 3 per cent during the half. This took the taking cost to income ratio slightly higher to 45.4 per cent.

The tier one ratio – a measure of capital strength - increased to 9.7 per cent from 9.1 per cent, as most banks prepare for tougher rules on capital.

CBA shares have risen 6 per cent so far this year, hitting their highest close in almost nine months on Tuesday. The shares have slightly outperformed a 5 per cent gain in the S&P/ASX 200 financials index.

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ejohnston@theage.com.au

BusinessDay with agencies

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